Before I start, I am obliged to remind our viewers that this is not advice only general commentary from my extensive research in this area.
ZIP Co has been one of the strongest talking points this year to date.With a remarkable 500% increase from January to October 2019, there is no doubt the BNPL industry cannot be ignored anymore. From my last article on ZIP, there was fears after UBS had issued a statement that investors of ZIP co and AfterPay, two of the biggest players in the Australian BNPL industry should sell due to concerns of “questionable” credit ratings of their clients. This news frightened a lot of speculative investors, hence causing a 35% collapse in share price from midway October through to the first week of November. Two weeks later UBS change their sell status on ZIP to a buy meaning the extreme fall allowed ZIP to be very underpriced.
Is the BNPL industry worthwhile?
The BNPL industry is growing at a significant rate with 1.95 million BNPL users in Australia, a 41% increase from 2018. This is linked to more individuals choosing BNPL companies as a way of micro-financing G&S with the benefit of no interest. Not only does this revolutionise the way we use credit but it also allows individuals to purchase goods in between income cash-flows, which in economic terms is “improving quality of life”.
In terms of ZIP, UBS have stuck with their $4.80 12 month target price while ZIP currently sits at $3.58 at the time of writing. In recent news, ZIP have raised $60 million through a placement of 16 million shares in response to a significant increase in demand. This means that naturally the share price will fall in the short term, however this is a powerful opportunity for ZIP co to expand globally in particular the expansion of ZIP operations in the UK.
ZIP financials are also a very solid indicator of growth as revenue doubled from $39m in 2018 to $80m in 2019 aswell as posting a positive EBITDA of $17.62m in 2019. ZIP in our opinion will reach its lowest price by mid December (market correction) and will begin to pull back come 2020, as all the evidence is pointing towards another strong year for ZIP. Individual research must be conducted*
How does the economy affect ZIP?
The Global economy is slowing as more countries such as China are maturing from the growth stage and entering the developed country club. With Global conditions worsening and Trump manipulating the markets with his iPhone, it has become apparent that speculators are becoming very unpredicatble. With a beta currently of 2.24 (3Y) theorticaly if the market falls over 2020 ZIP will be held accountable for a strong loss. These are the risks associated with any company , however the BNPL industry holds some strong non-systematic risk which investors must know.
Weighing up the Pros and Cons
For an effective investment decision, the positives and negatives must be established and discussed. Many investors believe that ZIP has serious potential and the share price will grow throughout 2020, which all evidence points towards. However, we have not seen the total risk that a BNPL company holds as the industry is so new. It’s also important that we understand Z1P do not pay dividends, which can increase the amount of risk the investment holds.
Therefore, as a ZIP investor you must be prepared to mitigate this risk either through portfolio diversification, introducing low Beta stocks into your portfolio, purchasing commodities such as Gold or buying inversely related shares in industries that perform well when BNPL may not. An example of an inversely correlated company may be Telstra, as industry related news (BNPL) would not effect Telstra share price. It will be a very exciting year for ZIP as they find signifcant ground amongst it’s competitors and enters new markets overseas.
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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Tyger Fitzpatrick